To give functional and
financial autonomy to NFRA (National Financial Reporting Authority), a Bill -
the Corporate Laws (Amendment) Bill, 2025 - is to be tabled in the winter
session of Parliament. The main areas of interest for NFRA will be:
Functional Autonomy:
Currently, the Central Govt makes rules on
functioning of NFRA. The Bill will enable it to draft its own regulations.
Regulators do not make laws but they are certainly supposed to frame the rules
under the laws for the sector they seek to regulate. The lack of rule making
powers for NFRA was a constraint which is now sought to be corrected.
Financial Autonomy:
NFRA is currently funded entirely by the
Central Government by the Ministry of Corporate Affairs. The Bill provides for
creation of a separate, dedicated fund for the Regulator. Regulators, to
operate effectively, need to have a dedicated source of finance, else they will
not be able to operate independently. Offering of financial autonomy
gives the NFRA the space to carve out its independence.
More Penal Powers:
The Bill is also expected to give it more
powers to take penal action against auditors and audit firms for
non-compliance.
Our views:
As noted above, both functional and financial
independence of the Regulator from the Government will improve the outcome for
which NFRA has been set up. Independence of rule making and the access to
finance without having to approach the Ministry of Corporate Affairs are both
salutary steps.
Granting it more power for
penal actions is something we shall have to read the details. Several
regulators have become like courts with the powers they wield and this is
something which has to be guarded against. However granting
enhanced penal powers gains significance when one considers an issue that crept
up in March this year. NFRA had appealed against a High Court order
that had criticized the Regulator's lack of separate divisions for handling
Audit Quality Reviews and disciplinary actions. Even as the Supreme Court
allowed it to proceed with disciplinary actions against CAs and Audit firms,
NFRA was however forbidden to issue final disciplinary orders.
